ONLINE GAMBLING HEADS UNDERGROUND

It was getting late on Oct. 12, the night before a sweeping anti-Internet gambling bill would be signed into law. Paul McGuire was at his computer, enjoying one last hurrah on PartyPoker, a site that had pledged to kick off all U.S. users as soon as the law left President Bush’s desk. “It was kind of like that last party before summer ends when you’ve got to go back to school,” says McGuire, a 34-year-old New Yorker and author of the popular “Tao of Poker” blog. “They were playing loose because it was the last night.” Maybe for some.

Not McGuire, whose online handle is “Dr. Pauly.” At 11 p.m., he simply closed down his PartyPoker account, withdrawing thousands of dollars in winnings accumulated in recent weeks. He later wired the funds to an offshore account with NETeller, an Internet bank registered in the Isle of Man, and opened new accounts with two other poker sites — both of them privately owned.

So much for the U.S. crackdown on Internet gambling. The Unlawful Internet Gambling Enforcement Act is designed to halt the flow of the roughly $6 billion that flows each year from U.S. gamblers to foreign Internet casinos by officially barring credit card companies and other U.S. financial institutions from processing illegal wagers. The Justice Dept. has long maintained that online poker gambling, like sports betting, violates terms of the 1961 Wire Act. But within hours of the new bill’s signing, McGuire was back online, betting on hands of Texas Hold ‘Em — and he was not alone. He’s now wagering through PokerStars.com and FullTiltPoker.com, both licensed by the Canadian Mohawk territory of Kahnawake and happily taking U.S. customers. [PokerStars also has a license with the government of the Isle of Man, where it is headquartered.] Both sites saw record numbers of players the weekend following the law’s adoption, according to Louisiana’s Casino City, which monitors traffic on online poker sites in its trade journals.

Less Transparency

Indeed, the new law will do little to stop online gambling, say gamblers, betting companies, and industry analysts alike. Instead, the law will drive out regulated, publicly traded companies like PartyGaming, the Gibraltar-based parent of PartyPoker, and make way for private gambling companies and banks based in nations where such industries are loosely policed at best. As a result, the new law could ultimately make billions of dollars in U.S. online gambling transactions more difficult to trace, and increase the likelihood that funds end up in criminal hands. “It leaves an opening for some of the more unscrupulous companies coming in from unregulated places,” says Frank Catania, past director of New Jersey’s Division of Gaming Enforcement and president of Catania Consulting Group [see BusinessWeek.com, 7/12/06, “Betting Against Online Gambling”].

The exodus is under way — and the companies that are on the way out are those with the most financial transparency. PartyGaming, 888Holdings, and SportingBet, all of which are traded on the London Stock Exchange, have said they’re exiting the U.S. market. Roughly 70% of PartyGaming’s $319 million in second-quarter sales and 50% of 888 Holdings’ revenue came from the U.S [see BusinessWeek.com, 10/2/06, “Party’s Over for Online Gambling”].

Private online gambling companies, on the other hand, have been defiant in the face of the new law, arguing it does not apply to them and cannot be enforced. Bodog Entertainment Group, which operates a Costa Rican online gambling site, has no plans to bar U.S. customers. “We’ve structured our business in such a way that we’ll have no problems adapting to any changes in the online gaming environment,” says Bodog founder Calvin Ayre. Similarly, PokerStars released a statement saying its lawyers had “concluded that these provisions do not alter the U.S. legal situation with respect to our offering of online poker games.”

The private companies maintain that Internet gambling regulations in the final version of the law, unlike those in the earlier version that was passed by the House of Representatives, do not explicitly ban casino-style games. As a result, they say they are still in a legal gray area that has existed since November, 2002, when the U.S. 5th Circuit Court of Appeals ruled the 1961 Wire Act only applied to “sporting events or contests” and not wagers in general [see BusinessWeek.com, 10/3/06, “Online Gambling Still in the Cards?”].

Role of E-Wallets

Whatever the legal grounds, private companies are benefiting from the role played by so-called e-wallets, which for years have been processing gambling payments credit card companies won’t touch. Although the largest e-wallet, eBay’s (EBAY) PayPal, does block gambling transactions, NETeller — the e-wallet of choice for PokerStars and other sites — has adopted a wait-and-see policy with regard to the law. In an Oct. 12 statement, the company said it will monitor how the U.S. government implements the act over the next 270 days. Other e-wallets include CentralCoin and Click2Pay.

As a publicly traded company on the London stock exchange, NETeller faces pressures that many other e-wallets don’t. Of the $7.3 billion in transactions it processed in 2005, many were for nongambling-related purchases. NETeller does not want to lose that business or spook investors. If NETeller does block U.S. customers, however, plenty of other private e-wallets will gladly take the millions in processing fees, typically a percentage of each transaction.

Many third-party processors do not reveal how much they take in or what they do with the money. Christopher Costigan, president of Gambling911.com, a trade publication for the online betting industry, expects the withdrawal of public companies will mean more loosely regulated, foreign-based e-wallets will enter the market. “There are always third-party processors popping up that are really fly-by-nights these are small companies in Central America, Latin America, and even the Middle East.” In several cases, e-wallets have operated for a few months and suddenly disappeared with the casinos’ and players’ money, says Costigan.

“Vulnerable to Financial Crime”

The relative secrecy within which many private e-wallets operate has made them targets for money laundering and the transfer of funds to illegal organizations, says Molly Millerwise, director of public affairs at the Treasury Dept. “When such service providers are located in the U.S., they are subject to both state and federal controls that help against money laundering and terrorist financing. Overseas outfits, however, are not subject to U.S. laws and thus are very much on our radar screen as emerging trends that are vulnerable to financial crime,” says Millerwise. The government’s Financial Action Task Force will address the issue in a paper in the coming days.

Tracking who is supporting e-wallets and what they do with the money could be cost-prohibitive, if not near-impossible, for banks. Pamela Johnston, a partner with Foley & Lardner and an expert in white-collar crime, says blocking e-wallet transactions is not as simple as refusing to process payments marked “7995” — the code for online gambling transactions. Many e-wallets process a mix of gambling and other transactions, making it difficult to indiscriminately block payments. In addition, some e-wallets use foreign banks to process transactions. CentralCoin, for example, is registered in the British West Indies and handles transactions through Gateway Financial Services. Thus, the U.S. bank does not even see the name of the e-wallet when money is wired, and instead sees the name of another bank. The foreign headquarters of many e-wallets also makes it difficult for banks to demand the nature of transactions. “I think it is going to be costly to enforce,” says Johnston. “This is no t like terrorism where you can police it with a list of names and organizations you need to watch for. You can write a computer program figuring that out. This is more multifaceted and complicated.”

But even if the U.S. cracks down on e-wallets, other payment options could be used. Catania says some e-wallets have begun accepting payments from phone cards. The users just load the card with money, open an e-wallet account with the funds, and then start gambling. When they want to cash out, they have the e-wallet send a check from a recognized financial institution that is then deposited in their account. “The easiest way to track money is to allow the credit card companies to take the bets online — this only makes it more anonymous” says Catania. Keith Furlong, deputy director of the Interactive Gaming Council, says he sees other shadier organizations getting into the act as well. “It will go a step further so that there will be some kind of e-cash product that will not be auditable, harder to trace, and make the movement of money much more difficult to follow.”

Deterring Newbies

U.S. politicians say they are aware that the act won’t stop the gamblers determined to bet. But they are hopeful that it could deter those only now getting involved because it is so easy to “click a mouse, bet the house.” Without more casual gamblers, less money will go to offshore accounts in general. Congressman Bob Goodlatte, the Virginia Republican who initially sponsored the legislation, says the bill adds a necessary hurdle to sending money to foreign casinos. “It will make it harder to get the money out of the country, but not impossible,” he says.

However, depending on how the bill is implemented, it may not be that much more difficult. After all, online gamblers already had to have e-wallet accounts set up in order to gamble. “Dr. Pauly,” for one, is betting that the law won’t stop many. “It will be a nuisance, but if one site goes down a new one will pop up,” says McGuire. He compares it to the illegal poker clubs in Manhattan that are closed down by police just to reopen in a new apartment building several weeks later. The night before PartyPoker stopped accepting U.S. bets; McGuire received an e-mail about a new New York club willing to take in some of the ousted players on an invitation-only basis. “One of the poker clubs goes down, another one will come up,” says McGuire. “I have no intentions of stopping.”